As year-end approaching, we are offering our clients some important tax highlights and updates that we believe are important to shed light on.
Its possible that that Congress could enact additional COVID-19-related tax legislation before the end of this year but as of now we are not going to speculate and offer planning around it.
The following are some topics that we feel they are important to address.
- Lawmakers and the IRS disagree on whether you are permitted to deduct the expenses you pay with your Paycheck Protection Program (PPP) loans. The problem started with poor drafting of the original forgiveness wording by the lawmakers. The IRS says it has to follow that bad drafting and disallow deductions for expenses paid with PPP loans. As of now, no payroll expense deduction is allowed if used PPP loan to pay it.
- Required minimum distribution (RMD) delayed to age 72. Before this change you were required to begin taking RMD from your IRA not later than April 1st following the year you reached age of 701/2, however, the IRS allows taxpayers who received RMDs in 2020 to roll them over into IRA or other qualified retirement plan as long as you roll it over within 60 days
- Age limit on contributing to an IRA removed. Before 2020 an individual who reached 70 ½ during the year could not contribute to a traditional IRA. The provision generally allows taxpayers, who have reached age 70½, to have their IRA trustee transfer up to $100,000 from their IRAs “directly” to a qualified charity, and exclude the IRA transfer from income. The IRA transfer to the charity also counts toward the IRA owner’s “Required Minimum Distributions (RMDs) for the year. Now its when you reached 72.
- New 10-year pay out requirement for those who inherit an IRA or qualified plan account. If an individual died before 2020 and someone other than the surviving spouse was named as the beneficiary of the decedent’s IRA or qualified plan account, RMDs to the named beneficiary were required to begin by December 31 of the year following the year of death and could be paid over the life expectancy of the named beneficiary. The act now imposes a 10-year pay out effective for individuals dying after 2019. This begins (RMD) by December 31 of the 10th year following the decedent’s death. This required 10-year pay out does not apply of the named beneficiary is the decedent’s spouse, has a qualified disability, is chronically ill, or is no more than 10 years younger than the decedent. If the named beneficiary is a minor, the 10-year pay out requirement does not begin until the beneficiary reaches majority age which is 18 in many jurisdictions.
- New option to waive 10% early withdrawal penalty up to $5000 per child born or adopted if withdrawal form you IRA or qualified retirement plan account occurs within one year of your child birth or adoption. If each spouse has a qualified plan, the $5000 penalty free distribution applies separately per plan per spouse
- Temporary tax relief for corona virus related distribution allows you to take up to $100,000 from an IRA and/or a qualified retirement plan without being subject to 10% early withdrawal penalty. You must qualify for this relief to be able to utilize this tax relief, meaning, you have been diagnosed with Covid-19, whose dependent or spouse has been so diagnosed, or has experienced on of the specifically listed adverse financial hardship. Distribution must be made between Jan 1 2020 and December 31 2020. You need to be aware that such distribution is taxable but the good thing is that you may report the income ratably over a 3 year period, also a person receiving a corona virus related distribution is allowed to roll over all or portion the distribution back into an IRA or qualified retirement plan within 3 years rather than the normal 60 days rule. This can be complicated, so please call If you have questions, as rolling over after your tax year end needs to be treated differently, amendment will be needed in this case.
- Temporary above the line deduction of up to $300 for charitable contribution for individuals who don not itemize deductions. For 2020 tax year only this is allowed.
- Temporary increase in charitable contributions for individuals who DO itemize. For 2020 tax year ONLY you can make contributions to qualified charities up to 100% of their AGI. This is up from 60%
- Increased child tax credit. Starting 2018 and through 2025, the Tax Cuts and Jobs Act (TCJA) doubled the previous $1000 child tax credit for each qualifying child, under age of 17 to $2000 while also significantly increasing the income level where the credit begins phasing out. Child Tax Credit begins phasing out as modified adjusted gross income exceeds $400,000 on a joint return and $200,000 for singles.
- Refundable Child Tax credit. up to $1,400 of the child tax credit is refundable to the extent of 15% of the taxpayer’s earned income In excess of $2,500. Thus, for 2020 tax year, a taxpayer with only one qualifying child would need earned income of only $11,833 to get the full $1,400 refundable child tax credit.
Example. $11,833 – $2,500 = $9,333 x 15% = $1,400
- $500 Family Tax Credit. A nonrefundable “Family Tax Credit” of up to $500 is available for each person the taxpayer could have claimed as a dependent under prior law but who does not qualify for the $2,000 Child Tax Credit. This credit will generally be available for: 1) A “Qualifying Child” who does not qualify for the $2,000 Child Tax Credit because the child is 17 or older, and 2) A “Qualifying Relative.
- Section 199A. with respect to Qualified Business Income, qualified REIT dividends, and Publicly traded partnership income, the 20% does not reduce your AGI or impact your calculation of Self Employment taxes. Its allowed in addition to your standard or itemized deductions so it reduces your taxable income.
If you have interest in a business as a sole proprietor, an S corporation shareholder or a partner in a partnership, you are a candidate for the 20% Sec. 199A deduction.
This deduction phases out if you have interest in a business that is classified as specific service trade or business, such as Attorney, Medical practitioner, Accountant, etc.
If your taxable income before the QBI is $163,000 or more (326,600 or more of married filing jointly) the QBI deduction starts to phase out when taxable income exceeds $213,300 or $426,600 if married filing jointly.
- Alimony payments. Effective for divorce or separation instruments executed after 2018, the deduction for alimony payments has been repealed. These alimony payments are no longer taxable to the recipient after 2018.
- An employer’s qualified reimbursement of an employee’s business expenses is deductible by the employer and tax free to the employee. Generally, employee business expenses that are reimbursed under an employer’s qualified “Accountable Reimbursement Arrangement” are deductible by the employer (subject to 50% limit on business meals) and the reimbursements are not taxable to the employee. However, reimbursements under arrangements that are not qualified “Accountable Reimbursement Arrangement” generally must be treated as compensation and included in the employee’s W-2.
- Deducting Entertainment Expenses. The Tax Cuts and Jobs Act generally repealed business deductions with respect to entertainment or recreation activities after 2017. The IRS says that taxpayers can still generally deduct 50% of the cost of meals with a business associate, potential business client, client, supplier, employee, agent, partner, etc. If an employer reimburses an employee’s deductible business meal and beverage expense under an Accountable Reimbursement Arrangement, the employer could deduct 50% of the reimbursement.
- Casualty Losses. From 2018 through 2025, the itemized deduction for personal casualty losses and theft losses has been suspended. However, personal casualty losses attributable to a federally declared disaster continue to be deductible. Casualty losses with respect to property held in a trade or business or for investment are still allowed.
- Medical Expenses Deductions. If you itemize your deduction you could deduct medical expenses to the extent your aggregate medical expenses exceed 7.5% of your AGI. This 7.5% threshold is scheduled to increase to 10% after 2020.
- $10,000 cap on state and local taxes. From 2018 through 2025, your aggregate itemized deduction for state and local real property taxes, state and local personal property taxes, and state and local income taxes (or sales taxes if elected) is limited to $10,000 ($5000 for married filing separate). Foreign real property taxes are not deductible at all unless the taxes are paid in connection with a business or in an activity for the production of income.
- Limitation on the deduction for interest paid on home mortgage “Acquisition Indebtedness”
Before the Tax Cuts and Jobs Act (TCJA), individuals were generally allowed an itemized deduction for home mortgage interest paid on up to $1,000,000 ($500,000 for married individuals filing separately) of “Acquisition Indebtedness” (i.e., funds borrowed to purchase, construct, or substantially improve your principal or second residence and secured by that residence). Subject to certain transition rules, TCJA reduced the dollar cap for Acquisition Indebtedness incurred after December 15, 2017 from$1,000,000 to $750,000 ($375,000 for married filing separately) for 2018 through 2025. Generally, any Acquisition Indebtedness incurred on or before December 15, 2017 is “grandfathered” and will still carry the $1,000,000 cap.
- Capital gains and losses. Generally, net capital gains (both short term and long term) are potentially subject to the 3.8% NIIT (Net Investment Income Tax). This could result in and individual filing a joint return with taxable income for 2020 of $496,600 or more ($441,450 or more if single) paying tax on his or her net long term capital gains at 23.8% rate ( the maximum capital gain tax of 20% + 3.8% NIIT). In addition, this individual’s net short term capital gains could be taxed as high as 40.80% (37% + 3.8%)
For individuals filing a joint return with 2020 Taxable Income of less than $80,000 (less than $40,000 if single), their long-term capital gains and qualified dividends are taxed at a zero percent rate.